Wednesday, April 27, 2011

Yesterday Judge Susan Nelson declined to stay her ruling that enjoined the N.F.L.'s so-called "lockout" of players. Before the lockout, the players and the league were parties to a collective bargaining agreement that contained numerous provisions that would otherwise be deemed horizontal restraints subject to analysis under Section 1 of the Sherman Act, which bans unreasonable restraints of trade. However, provisions that are part of bona fide collective bargaining agreements governing core employment conditions are generally immune from antitrust scrutiny, and the N.F.L. has invoked this "labor exemption" to preclude antitrust review of the various restraints contained in the agreement.

Last month, of course, the players voted to decertify their union, in an effort to end the collective bargaining agreement, avoid the labor exemption, and thus render the league's various restraints subject to the antitrust laws. Thus, the players' post-de-certification complaint alleges that the "lockout" is a concerted refusal to deal by the N.F.L.'s 32 teams, each supposedly an independent business, and that the "lockout" is unlawful per se under Section 1 of the Sherman Act. In particular, the plaintiffs allege that the lockout is an agreement between rivals not to compete for the services of players, an agreement that destroys competition and thus reduces the salaries that players would otherwise receive. The plaintiffs also allege that the lockout is a means of enforcing a price fixing scheme, because the concerted refusal to employ the players will purportedly force the players to accept salaries lower than those that their current contracts require their teams to pay. (See Complaint Paragraphs 117-20).

In addition to the "lockout" claim, the plaintiffs have also challenged the N.F.L. draft and so-called "entering player pool." The draft, it is said, is a horizontal agreement between rivals that allocates to individual firms the exclusive right to negotiate with drafted players, while the "entering player pool" caps the amount that teams will pay rookies. (See Complaint Paragraphs 126-27). The plaintiffs have also challenged the salary cap and the league's restrictions on free agency, again claiming that these rules constitute unlawful horizontal agreements between rivals to reduce competition for players, thereby driving players' salaries below that which a competitive market would set. (See Complaint Paragraphs 132-33).

It should be noted that Judge Nelson did not rule on the merits of any of the plaintiffs' antitrust claims. For one thing, the plaintiffs did not seek to enjoin the draft, entering player pool, salary cap, or restrictions on free agency. Thus, Judge Nelson did not consider the antitrust status of these agreements. Moreover, while the players did seek to enjoin the lockout as a violation of the Sherman Act, the N.F.L. did not, according to Judge Nelson, contest the plaintiffs' claim that the lockout was a concerted refusal to deal/group boycott and a per se violation of Section 1 of the Sherman Act. (See Brady v. N.F.L., at page 83) ("the NFL does 'not contest that their ‘lockout’ is a per se unlawful group boycott and price-fixing agreement in violation of antitrust law.'”) (quoting the plaintiffs' memorandum). Instead, the N.F.L. focused its efforts on arguing that the so-called "non-statutory labor exemption" still barred the plaintiffs' claims despite the players' vote to decertify. Finally, Judge Nelson applied a standard for issuance of a preliminary injunction that merely required the plaintiffs to establish that there was a "fair chance" that they would demonstrate that the lockout violated the Sherman Act (in addition to the other requirements for equitable relief, e.g., a showing that money damages could not fully compensate the plaintiffs) and expressly held that the plaintiffs could meet this standard without showing that success on the merits of the litigation was "likely." (See Brady v. N.F.L., at page 69).

* * * * *

Thus, as the litigation proceeds, the N.F.L. will presumably challenge the plaintiffs' various antitrust claims with greater vigor. There are, it should be noted, numerous potential arguments in the N.F.L.'s arsenal. The balance of this post will focus on two such arguments.

1. Group Boycotts and Concerted Refusals to Deal are Rarely Unlawful Per Se. The plaintiffs' complaint repeatedly alleges that group boycotts or concerted refusals to deal are unlawful per se, that is, violate Section 1 of the Sherman Act without regard to their actual competitive effect. While this may have been an accurate statement of the law in the 1970s, the legal landscape has changed significantly since then. For one thing, the Supreme Court has greatly narrowed the scope of any such per se rule. In 1985, the Court declined to condemn as unlawful per se a group boycott that was ancillary to an otherwise legitimate joint venture. SeeNorthwest Wholesale Stationers v. Pacific Stationery, 472 U.S. 284 (1985). Both before and after the Northwest Wholesale Stationers decision, lower courts rejected a blanket per se rule against group boycotts/concerted refusals to deal. SeeRothery Storage v. Atlas Van Lines, Inc., 792 F.2d 210 (D.C. Cir. 1986) (group boycotts generally analyzed under the Rule of Reason); United States Trotting Association v. Chicago Downs Ass'n, 665 F.2d 781 (7th Cir. 1981) (en banc) (group boycotts by self-regulating sports associations are properly analyzed under the Rule of Reason). As Judge Posner explained more than three decades ago, concerted refusals to deal are generally self-help methods of enforcing other rules or practices and thus cannot be analyzed in a vaccuum. See R. Posner, Antitrust Law 207 (1976). Thus, instead of focusing on the challenged boycott or refusal to deal itself, courts should instead focus on the underlying rule or practice the boycott or refusal to deal is seeking to enforce. Indeed, this seems to be the approach taken by the Supreme Court in NCAA v. Bd. of Regents of the University of Oklahoma, 468 U.S. 84 (1984). There, the University of Georgia and the University of Oklahoma challenged the NCAA's collective refusal to deal with schools that declined to adhere to the league's horizontal restrictions the prices and output of game broadcasts. The district court found, inter alia, that the NCAA had engaged in an unlawful group boycott. However, no Justice on the Supreme Court argued that the threatened exclusion of Oklahoma and Georgia from the NCAA was unlawful per se. Instead, the Court, in an opinion authored by Justice Stevens (pictured above) analyzed the underlying restraints on price and output that the league was seeking to enforce, found that such restraints were properly judged under the Rule of Reason and condemned them as unreasonable restraints.

This is not to say that all concerted refusals to deal should be analyzed under the Rule of Reason. Some may well be "naked," that is, not efforts to enforce a rule or practice that might otherwise be valid. Some, however, seem plainly ancillary to other agreements that are themselves properly analyzed under the Rule of Reason. Take the N.F.L. draft, whereby the league allocates to a particular team the exclusive right to negotiate with a player the team has drafted. While this rule is admittedly the result of horizontal concerted action, courts nonetheless properly analyze it under the Rule of Reason. (See below). Proof that teams have enforced this provision via a group boycott should not short-circuit the process of determining whether or not the draft enhances or detracts from economic welfare.

2. SeveralChallenged Restraints Will Avoid Per Se Condemnation and Are Thus Properly Analyzed Under the Rule of Reason. Plaintiffs have also claimed that various restraints they have challenged are unlawful per se or otherwise unreasonable. For instance, the plaintiffs argue that the draft system combined with the entering player pool, which limits the salaries paid rookies, is itself unlawful per se, and, in the alternative, unreasonable. In support of this argument, the plaintiffs cite Smith v. Pro Football, Inc., 420 F. Supp. 738 (D.D.C. 1978). The plaintiffs also claim that the salary cap and various restrictions on free agency are unlawful per se price fixing and that, in any event, such restrictions are unreasonable because the defendants possess market power and the restrictions "are not necessary to achieve any procompetitive objective." (See Complaint Paragraph 133).

However, the N.F.L. will have little to fear from decisions like Smith, and the sort of reasoning that informed that decision and others from that era. When Smith was decided, horizontal agreements were automatically unlawful per se, even when such restraints were ancillary to otherwise lawful joint ventures by small market participants. The classic case in point was United States v. TOPCO, 405 U.S. 596 (1972), where the Supreme Court condemned as unlawful per se ancillary restrictions on horizontal rivalry between small grocery chains that had formed a cooperative venture to create private label products for the members' stores. Indeed, the Court condemned the restraints despite the trial court's finding that the members would not have formed the venture without the restraints, which limited free riding by venture participants and thus encouraged individual venture partners to promote the venture product. (I discuss the trial court's findings and the TOPCO decision at pages 469-71 of this article in the Antitrust Law Journal.)

There is no doubt that a straight-forward application of TOPCO supports decisions like Smith. And, if TOPCO were still good law, the NFL would be hard-pressed to avoid per se condemnation of its restraints. However, the Supreme Court subsequently refused to apply TOPCO in the context of sports leagues, and other subsequent developments suggest that courts would reject per se condemnation of the restraints the players have challenged in favor of a forgiving Rule of Reason.

In NCAA, mentioned above, the Court evaluated the NCAA's restrictions on: (1) the number of college football games that networks could televise, (2) the number of times each school could appear on television and (3) the prices schools could charge a network for the right to televise its games. The Court acknowledged that application of TOPCO would require per se condemnation of the challenged restraints which reduced output and increased prices "on their face." Nonetheless, the Court declined to condemn the restraints as unlawful per se, because, it said, some horizontal limitations on rivalry --- though not necessarily those before the Court --- were necessary for college football to exist in the first place. Such restrictions included limitations on how much colleges could pay athletes, requirements that student athletes attend class, limitations on the number of scholarships a school could provide, and agreements on the rules teams would observe on the field. Such horizontal restrictions on unbridled rivalry, including restrictions on the price that schools would pay for players services were, the Court said, presumptively reasonable because they likely enhanced the quality of the product offered by the NCAA and thus enhanced interbrand competition with other entertainment options.

Thus, NCAA stands for the straight-forward proposition that horizontal restraints --- even explicit restraints on price or output --- imposed by a sports league are judged under the Rule of Reason. Indeed, such Rule of Reason treatment applies without regard to whether the defendant can offer a plausible redeeming virtue that such restraints might produce. Indeed, the Supreme Court expressly reaffirmed this reasoning, albeit in dicta, in the context of professional sports in its recent decision, also authored by Justice Stevens, in American Needle v. N.F.L. (May 24, 2010).

Indeed, the case for Rule of Reason treatment is stronger in the current case than it was in NCAA. Separate and apart from NCAA's special rule for sports leagues, post-TOPCO decisions have emphasized that Rule of Reason treatment of challenged restraints is the norm, and that courts should only condemn restraints as unlawful per se if such agreements are: (1) always or almost always anticompetitive and (2) also always or almost always lack redeeming virtues. See Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1978) (citing Northern Pacific Ry. v. United States, 356 U.S. 1 (1958)). As already noted, the NCAA Court did not identify any possible redeeming virtues that the restraints challenged there may have produced; a straight-forward application of the test for per se illegality would have required condemnation of such restraints. Not so for the restraints the players are challenging here. While horizontal restrictions like the draft and limits on free agency are "always or almost always anticompetitive" within the meaning of this test, they nonetheless avoid per se condemnation because they may produce redeeming virtues. Indeed, for several decades now, economists and legal scholars have recognized that unbridled rivalry can lead to a market failure and thus a non-optimal allocation of resources. Indeed, Oliver Williamson recently earned a Nobel Prize for work building on the foundation laid by Ronald Coase explaining how non-standard contracts, once viewed with suspicion by economists and antitrust courts alike, generally reduce transaction costs and overcome market failure, thereby enhancing economic welfare. The innumerable horizontal restraints adopted by sports leagues are no exception. (I explain both the historical hostility to such restraints and the Williamson/Coase interpretation of such agreements on pages 113-44 of this 2003 article in the Illinois Law Review.) For instance, the draft and limitations on free agency, while limiting unbridled rivalry for player talent, help ensure "competitive balance" by preventing the richest teams in the league from buying up all of the best talent and thus predictably winning each game. In fact, the American Needle decision expressly recognized, albeit in dicta, that maintenance of competitive balance is a bona fide objective that can justify otherwise unlawful horizontal restraints. The plaintiffs themselves seem to recognize that the challenged restraints can produce benefits, as they merely argue that the restraints are not necessary to produce such benefits, that is, that the restraints produce benefits that could be achieve via other means that the plaintiffs do not specify.

None of this is to say that all challenged restraints will survive; the mere fact that a restraint produces benefits does not automatically protect the restraint from condemnation. Courts must nonetheless "weigh" or "balance" such benefits against any harms the restraints produce. Nonetheless, once courts decide to evaluate such restraints under the Rule of Reason, the plaintiffs will bear the initial and substantial burden of proving that the restraints produce actual anticompetitive harm, a burden that plaintiffs rarely satisfy. (Though, satisfying this burden may be easier in this context, given the N.F.L.'s strong market position.) Moreover, once defendants show that challenged restraints produce benefits, plaintiffs generally fail to convince courts that a restraint's harms outweigh its benefits. Thus, despite their strong start, plaintiffs' antitrust action may stall in the red zone, or even earlier.

An article last Monday in the Wall Street Journal "[w]here the tax money is" examined President Obama's purported claim that raising taxes on the wealthy will result in meaningful deficit reduction, thereby making the sort of spending reductions proposed by others, including Congressman Paul Ryan of Wisconsin, unnecessary. To this end, the article calculates the impact on federal revenue and thus the deficit of a 100 percent confiscatory tax on indivduals who earn $380,000 or more per year and finds that such a tax would raise $938 billion annually, far less than the current deficit of over $1.6 trillion. Moreover, a 100 percent tax on those individuals in the top five percent of the income distribution would yield $1.89 trillion, just enough to cover the deficit.

Note that these calculations certainly overstate the impact on the deficit of such confiscatory taxation. For one thing, the "wealthy" individuals in question already pay a sizeable portion of their income in taxes, with the result that the net increase in revenue resulting from a 100 percent tax rate would be less than the $938 billion and $1.6 trillion figures, respectively. Moreover, at least some individuals who must pay their entire salary to the government would work less, or not work at all, and thus create less income, if the government simply confiscated their income under the guise of "taxation." Such a reduction in work effort, of course, will also reduce the rate of economic growth and thus reduce the income of other citizens as well, thereby reducing tax payments from lower income groups. In short, even a 100 percent tax rate on high income earners, whether "high income" is defined as the top 1 percent or top 5 percent, defined, will still leave the United States with a very large deficit.

How, then, will the United States close its titanic budget deficit, if that is what she chooses to do? One way, of course, is to reduce spending, along the lines suggested by Congressman Ryan. If, however, the United States rejects meaningful spending reductions, the article predicts that Congress will, to quote bank robber Willie Sutton (pictured above), "go where the money is," that is, raise taxes (either directly, or by eliminating deductions) on indivduals in the middle and upper middle classes. For, as the article points out, individuals in the $50,000-$200,000 range produce more taxable income than individuals who earn over $200,000. Such an approach, it should be noted, would be consistent with the observation of nobel laureate Friedrich Hayek, also pictured above, to the effect that a chief function of high (progressive) tax rates on "the rich" is to induce individuals in the middle classes to accept rates that, while high in an absolute sense, are lower than those paid by the rich. (There is, of course, precedent for such an approach. In 1960, for instance, the top marginal federal income tax rate, levied on incomes of $400,000 and above, was 91 percent. Moreover, the marginal rate on income between $12,000 and $16,000 was 30 percent; the marginal rate on income between $24,000 and $28,000 was 43 percent, the marginal rate on incomes between $36,000 and $40,000 was 53 percent, the marginal rate on incomes between $88,000 and $100,000 was 72 percent, and so on. It short, while rates on the "rich" were quite high, so too were rates on individuals in the middle and upper-middle classes.) As Hayek put it:

"It would probably be true, on the other hand, to say that the illusion that by means of progressive taxation the burden can be shifted substantially onto the shoulders of the wealthy has been the chief reason why taxation has increased as fast as it has done and that, under the influence of this illusion, the masses have come to accept a much heavier load than they would have done otherwise. The only major result of the policy has been the severe limitation of the incomes that could be earned by the most successful and thereby gratification of the envy of the less-well-off."

Friday, April 22, 2011

This blog has previously debunked the myth that China somehow leads the world in clean energy. (SeeU.S. Crushing China in Clean Energy Race) (Seehere for one such assertion that China might "clean our clock" when it come to clean energy technology.) As previously explained, China does lead the world in carbon emissions, a dubious distinction, and the country emits twice as much carbon per unit of output as the United States. Moreover, some estimate that, by 2030, China's carbon emissions, now growing by leaps and bounds, will equal the world's entire current emissions.

Yesterday, in a devastating Washington Post Op-Ed, Bjorn Lomborg further exploded the myth of China's Green Superiority, explaining that, while China manufactures numerous wind turbines and solar panels for export to other countries, its own utilization of such technology is cosmetic at best. Thus, it seems, China's role in green energy technology is an example of economic opportunism, whereby the country takes advantage of its various advantages to manufacture solar panels and wind turbines, all the while lagging behind other nations in the actual utilization of such devices.

Here are the salient points of Lomborg's essay, followed by some additional thoughts.

1) While China produced one half of the world's solar panels in 2010, it exported 99 percent of that production to other countries, many of whom subsidize the purchase and installation of such (expensive) panels. For all the ballyhoo about Chinese solar panel production, solar panels account for one-half of one-thousandth of 1 percent of Chinese electricity production. Basically, then, Western nations are subsidizing Chinese production of a very expensive method of generating electricity.

2) While China installs about one third of the world's wind power turbines, much of this has been "for show." Many such turbines are not even connected to China's power grid, and a 2008 study found that one third of China's wind turbines are not in use. Thus, wind power generates one-twentieth of one percent of China's electricity. By contrast, your blogger's own research reveals that wind power accounts for almost two percent of American electricity generation. That is, windpower is nearly 40 times more prevalent in the United States than in China.

4) China does lead in the production of so-called "solar heaters," which heat water for cooking, bathing, and other uses. In China, such heaters provide four times as much energy as windpower. The production of such heaters is not subsidized; Chinese consumers demand them because they far most cost-effective than, say, conventional water heaters.

Some additional thoughts:

--- Many point to ChinaAs Lomborg suggests, China's apparent emphasis and advantage in manufacturing solar panels is simply one manifestation of its larger emphasis on manufacturing for export. For instance, according to one source, China produces more than three times as much steel as the United States and Japan combined. (Note that the same source reports that China leads the world in steel production, with Japan second and the United States third.) China also replaced the United States as the largest exporter of information technology products in 2005. There are numerous reasons for China's growing dominance in these and other industries, but China's supposed commitment to "Green Energy" has nothing to do with, say, China's exploding steel production. On the contrary, and quite ironically, China's lax enforcement of its own environmental laws results in the sort of smog pictured above and also gives its manufacturing base, including firms that manufacture solar panels and wind turbines, a cost advantage over, say, American companies subject to more stringent environmental regulations. (This report, by the Alliance for American Manufacturing, documents the lax enforcement of China's environmental laws vis a vis the steel industry.) Ditto for China's relatively lax regulation of other subjects.

--- Much of the public rhetoric on this issue apparently conflates two different questions: (1) the level of a nation's carbon emissions, which depends in part on the sources (e.g., fossil v. non-fossil) of a country's electricity and (2) whether the country in question itself produces wind turbines, solar panels, and other devices for generating electricity without relying on fossil fuels.

As the China example shows, a nation can apparently thrive in one category while entirely falling down in another. Moreover, at the end of the day, performance in first category is far more important than the second. Indeed, if countries are serious about performing well in the first category, then performance in the second category will take care of itself, as producers of electricity will demand clean methods of electricity generation, thereby inducing the private sector to invest capital and knowhow in the production of such devices.

--- There is no doubt that domestic subsidies for the production of solar panels, wind turbines and the like will encourage firms that manufacture such items to locate in the United States and thus increase the number of Americans who work in "green-related industries." It's also the case that domestic subsidies for the production of paper clips will increase the number of Americans working in the paper clip industry. Someone, however, must pay for such subsidies, and a nation cannot subsidize itself to a strong jobs base.

--- A nation concerned about reducing its carbon emissions and providing good jobs for its citizens should focus on: (1) providing the appropriate incentives for consumers and producers to make only reasonable uses of carbon-based electricity and (2) providing an economic environment in which all companies, whether or not they make windmills, can grow and thrive, free of the shackles imposed by unduly onerous regulation.

Tuesday, April 19, 2011

Over at Conglomerate, Eric Gerding, a respected Professor of Corporate Law, apparently disapproves agreements between universities and credit card companies creating so-called affinity cards, whereby universities help companies market such cards to students and alumni, in return for a portion of the earnings that such cards produce. Gerding plainly does not like such arrangements, and he urges readers to examine a database created by the Federal Reserve that reports on the terms of such deals, including what payments universities have received, how many cards have been issued pursuant to such arrangements, and the identity of the card issuer. (For instance, a search of the database will reveal that the Duke University Alumni Association received $1.375 million from Chase Bank, USA N.A., that there are over 8,000 cards issued pursuant to the Duke/Chase Affinity program, and that 4 such cards were issued last year.) Congress required the Fed to create the database in the so-called Credit Card Accountability, Responsibility and Disclosure Act of 2009, and the Fed in turn required companies with these programs to turn over such information, without providing the companies with compensation for the time and effort spent complying with this request.

Here is the substance of Professor Gerding's critique:

"These [affinity] agreements allow issuers to create 'affinity' cards, that is credit cards branded for a particular university (Go Heels!) and marketed towards the students and alumni of that university. It is a familiar business model: if you want to get students hooked on debt, start dealing at the playground. To get inside the schoolyard, cut the principal in on the action. Universities can earn over a million each year with these deals. Check out how much your alma mater has made from deals with credit card issuers at this nifty searchable database."

Unlike Professor Gerding, I see no problem with the existence of such affinity agreements. Moreover, in my view, the 2009 Act's requirement that the Fed and credit card companies spend real resources compiling (and presumably updating) such a database is a waste of society's scare resources at best and at worst an effort to distort the competitive process of credit card issuance.

Let me explain.

1) We live in a free society. In free societies adults may enter voluntary agreements, including agreements to obtain credit cards and borrow money. Indeed, individuals leave the state of nature and form civil society in part to empower the community to enforce such voluntary agreements, which make individuals' property more valuable and help them acquire more.

2) College students and alumni are adults. As such they are free to marry (or not) join the army, enter college or drop out, eat three meals a day (or not), exercise regularly (or not), etc. They are even free to obtain credit cards and borrow money, if they choose to use such cards in this way.

3) While credit cards empower their holders to borrow, they do not require them to do so. Instead, such cards reduce the cost of transacting, e.g., allow consumers to avoid carrying large sums of cash (which can otherwise earn interest in a bank account, for instance). There is no reason, a priori, to deprive college students of these benefits or, for that matter, the option to use a credit card to borrow.

4) There is no logical basis for concluding that such affinity agreements, which are simply creative methods of distribution, produce harm. The market for issuance for credit cards is relatively unconcentrated. The largest issuer (Chase) has a 19 percent share of the issuance market, the second largest (Bank of America) has a 16 percent share, the third largest (CITI) has a share of 12 percent, the fourth largest (Amex) has a share of 9 percent, and the fifth largest (Capital One) has a share of 6 percent. Issuers ranked between 6 and 14 have shares of between 6 percent and 1 percent. Thus, the so-called Herfindahl-Hirschman index --- the sum of the squared market shares of industry participants --- for this industry is less than 1,000. Counts and the antitrust enforcement agencies would consider the market unconcentrated and thus not susceptible to an exercise of market power, whether unilaterally or via lawful coordinated interaction. (See e.g. Department of Justice and Federal Trade Commission Joint Merger Guidelines here.) (Of course, express collusion between market participants would be a felony.)

5) No one forces students or alumni to sign up for affintity cards. If such cards provide onerous terms, then consumers can simply turn to providers of non-affinity cards that provide better terms. Moreover, non-standard agreements such as exclusive dealing contracts, tying contracts, and various other restraints that arise in unconcentrated markets are presumptively beneficial, given that the proponents of such agreements have expended real resources negotiating and enforcing them in an environment in which the acquisition or maintenance of market power is not plausible. There is no reason to apply a different presumption to so-called "affinity agreements." While such agreements give the issuer that is a party to them the chance to convince a consumer to sign up for the affinity card, such consumers have numerous credit card options and may even choose payment vehicles other than credit cards. Duke, for instance, has 140,000 alumni. Fewer than 9,000 have a Duke affinity card, and some of those who do presumably have other cards as well.

6) Given the absence of any plausible theory of harm (the concentration statistics listed above are public), the statutory requirement to create a database results in a waste of resources. Moreover, the requirement imposes costs on those firms that employ such (presumptively efficient) agreements, thereby disadvantaging those firms simply because they have employed a successful marketing device. Cynics might guess that Congress imposed this requirement at the behest of credit card issuers that do NOT employ such arrangements, who are seeking to raise the costs of their rivals by forcing them to comply with onerous regulatory requirements.

7) To be sure, the cost of compliance with this particular regulation is modest. The American credit card industry will survive. Still, the rationale for the requirement and the purported concern for the welfare of (adult) college students and college alumni on which it rests reflect Nanny-like paternalism that is inconsistent with the precepts of a free society. Moreover, even if no single regulation can, by itself, hamper a business numerous regulations taken together can do so, just as numerous Lilliputian ropes held down Gulliver.

Thursday, April 14, 2011

Because of an April 15 holiday, today is tax day, and Americans are presumably reflecting on whether our current level of taxation is in fact justified.

More than a century ago, Oliver Wendell Holmes, pictured above, quipped that "Taxes are what we pay for civilized society, including the chance to insure." The occasion was a challenge to a Philippine tax on insurance premiums paid by a foreign corporation exporting merchandise from that country. See Compania General de Tabacos v. Collector, 275 U.S. 87 (1927) (Holmes, J. dissenting). While the Supreme Court invalidated the tax as an effort to regulate contracts beyond the territorial jurisdiction of the Philippine government, cf. Allgeyer v. Louisiana, 165 U.S. 578 (1897), Holmes (joined by Justice Brandeis) would have sustained the tax, in part because the Philippine government protected the property that was insured, thereby making it reasonable for that government to levy a tax on the property.

Many have invoked the Holmes quote or a version thereof in support of the sort of increased taxes necessary to support the modern welfare state. Seehere, here, and here for just a few examples. The IRS has even inscribed the quote above the entrance to its headquarters in Washington.

Several years ago your humble blogger rebutted such reliance on the Holmes quip to justify even higher taxes than Americans were already paying, in the following letter to the Daily Press of Hampton Roads:

"The editorial on the Social Contract ("Envisioning 2004," Jan. 4) cites Justice Oliver Wendell Holmes for the proposition that "taxes are what we pay for a civilized society," and laments the "crass self-interest" that purportedly animates anti-tax sentiments. While memorable, the Holmes quip is of little relevance to modern disputes over the proper level of taxation and public spending, coming as it did at a time when taxes claimed only a small fraction of our national wealth. When Holmes penned this aphorism in 1904, taxes paid to local, state and federal governments accounted for about 6 percent of gross domestic product. Today these taxes account for about 30 percent of GDP -- a five-fold increase. At the same time, per capita GDP is more than eight times larger in real terms today than it was in 1900. Thus, in the 100 years since Holmes equated taxes with civilization, government has consumed an ever-increasing share of a constantly growing pie. Even after adjusting for inflation, the average American now pays 40 times more for government than he or she paid at the beginning of the 20th century. I doubt we have become 40 times more civilized as a result. Before we further expand government's dominion over the wealth we create, we may want to ask whether those who already remit enormous sums to the public fisc are receiving fair value in return. A just social contract demands no less."

It's certainly true that some taxes are a necessary element of what we properly call civilization. As James Madison put it in Federalist 10, "the first object of government" is the "protection of different and unequal faculties of acquiring property," which results in "the possession of different degrees and kinds of property." (Madison repeated this sentiment in his 1792 Essay on Property, stating that: "Government is instituted to protect property of every sort; as well that which lies in the various rights of individuals"). Individuals once lived in the state of nature, where they enjoyed absolute freedom from coercion imposed by government which, by definition, did not exist. In this state, however, individuals, no matter how strong, were under constant threat from one another. As a result, men and women left the state of nature to form political society, each giving up a portion of his or her liberty on the assumption that similar forfeitures of liberty by others would, taken together, enhance each members' welfare.

"Society" as defined here entailed a legal system that recognized and enforced property rights (including rights in intellectual property), protected bodily integrity, enforced private contracts, and penalized fraud, all functions the private market cannot perform. This is where taxation comes in. Government cannot perform these various functions without hiring individuals --- police, prosecutors and judges, for instance --- who presumably will not work for free. Also, to the extent that enforcement of such rules requires the state to imprison offenders, such imprisonment will itself cost money. Moreover, the world is large enough that there are predictably several political communities, each with jurisdiction over different territory. If some such communities prey on others, a need will arise for "national defense" via an army, navy, air force, etc. Here again, providing such a defense will cost money, money which the state must raise by taxation. (Absent coercive taxation, individuals will "free ride" on contributions they hope others will make, and if all pursue this strategy, no individual will contribute.) In addition to national defense, there are other services that only government can provide, or at can provide more effectively than the private sector. Examples include the construction of highways and airports either directly or, instead, by delegating the (coercive) power of eminent domain to private parties who can then construct such roads.

The resulting common law baseline and community secure from external threats, supplemented by antitrust law, provides the sort of institutional framework necessary to free market competition and the resulting specialization and wealth-maximizing allocation of resources, i.e., labor, capital and technical know how. Such free market competition also promotes the individual opportunity necessary for persons to exercise fully the faculties of which Madison spoke. In short, taxation helps support various state activities necessary to give rise to the society that men and women seek upon leaving the state of nature and thus gives rise to "civilization."

State and national governments provided these necessary governmental services when Holmes penned his aphorism in the 1920s. However, as letter quoted above notes, per-capita taxes have, in real terms, risen by a factor of 40 since then. Are we today 40 times more civilized? Of course not. While some taxes are necessary for civilization, others have nothing to do with it. For instance, some taxes support regulatory schemes --- enforced by state employees (including judges) ---that unduly restrict economic liberty and opportunity and reduce society's economic welfare. Starting in the 1930s, that is, after the Holmes quip, many states and the national government began to impose coercive restrictions on prices, output, and entry, often creating the equivalent of cartels that would properly be deemed unlawful per se under the antitrust laws if imposed by private parties. Such state-imposed cartelization extended to labor markets. Thus, states and the national government imposed (and still impose) minimum wages, maximum hours, and other terms of employment contrary to those produced by free, competitive markets. Moreover, the National Government has empowered unions to "bargain collectively" with businesses operating in interstate commerce, a right enforced by a federal agency, the National Labor Relations Board, which employs, at taxpayer expense, more than 1500 individuals. After this and other exemptions, such "collective bargaining" over wages would violate the Sherman Antitrust Act, just as it would violate that Act for a jurisdiction's court-appointed lawyers to agree to boycott such appointments until the Court raised their fees. SeeFTC v. Superior Court Trial Lawyers Ass'n, 493 U.S. 411 (1990) (declaring such a boycot seeking higher wages under the Sherman Act unlawful per se).

These various price, wage and output fixing schemes, some of which survive to this day, all supported by tax rates higher than they would otherwise be, exceed the scope of governmental authority implied by rationale, outlined above, for leaving the state of nature and forming a political society. They enrich proponents of such schemes at the expense of others. Moreover, such "regulations" in no way enhance our civilization. Instead, such schemes raise prices and wages above the competitive level, reduce output in the industries governed by such schemes and induce the reallocation of resources to less productive uses, in industries not governed by such schemes. Indeed, far from advancing such civilization, Madison opined, again in Federalist 51, that such schemes are instead reminiscient of the state of nature that men and women left to form civilization:

"In a society under the forms of which the stronger faction can readily unite and oppress the weaker, anarchy may as truly be said to reign as in a state of nature, where a weaker individual is not secured against the violence of the stronger; and as, in the latter state, even the stronger individuals are prompted, by the uncertainty of their condition, to submit to a government that may protect the weak as well as themselves."

Madison also decried such "regulation" a few years later, in the 1792 Essay on Property cited above, viz:

"That is not a just government, nor is property secure under it, where arbitrary restrictions, exemptions, and monopolies deny to part of its citizens that free use of their faculties, and free choice of their occupations, which not only constitute their property in the general sense of the word; but are the means of acquiring property strictly so called."

Of course, these are not the only exercises of state authority that exceed the rationale for political society and seem to replicate elements of the state of nature. In some cases states and the national government simply raise taxes on some citizens and subsidize others for reasons unrelated to any valid public purpose. Agricultural subsidies are a prime example. Here again such programs have nothing to do with enhancing the quality of civilization.

* * * * *

What does all this mean for those interested in the link between taxes and civilization? First, there is no doubt that some taxation is necessary to what we consider civilization. No one, so far as a I know, seeks to repeal those taxes necessary to create and enforce property rights, protect bodily integrity from invasion by others, enforce private contracts and provide national defense and similar goods that only government can provide. At the same time, the conclusion that taxes are necessary for civilization does not thereby justify any and all taxes and government programs that such taxes support. Indeed, some such taxes and resulting programs actually bear resemblance to the state of nature, as some members of the community employ state-backed coercion to advantage themselves at the expense of others. Repeal of the taxes necessary to support these programs and concomitant repeal of the programs themselves would make us MORE civilized. Those who invoke Holmes' quip in support of the current level of taxation and/or even higher taxes simply misunderstand the appropriate scope of government and thus the link between taxes and civilization.

In "honor" of April 15, your humble blogger thought it best to recall some of Ronald Reagan's wisdom on taxation. Loyal readers will recall an analogous post on April 15, 2009, reproducing some of Winston Churchill's wisdom on the subject.

1. "Republicans believe every day is the Fourth of July, but Democrats believe every day is April 15th."

2. "We don't have a trillion dollar debt because we haven't taxed enough; We have a trillion dollar debt because we spend too much."

3. "History shows that when the taxes of a nation approach about 20% of the people's income, there begins to be a lack of respect for government. . . . When it reaches 25%, there comes an increase in lawlessness.”

4. "The taxpayer - that's someone who works for the federal government but doesn't have to take the civil service examination."

5. "The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it."

CNN and Money Magazine recently announced a list of the 10 fastest growing cities in the United States, based upon figures from the most recent census. That is, the following ten cities had the fastest growth rates in the past decade:

1. Palm Coast, Florida, 92 percent.

2. St. George, Utah, 52.9 percent.

3. Las Vegas, Nevada, 41.8 percent.

4. Raleigh, North Carolina, 41.8 percent.

5. Cape Coral, Florida, 40.3 percent.

6. Provo, Utah, 39.8 percent.

7. Greely, Colorado, 39.7 percent.

8. Austin, Texas, 37.3 percent.

9. Myrtle Beach, South Carolina, 37 percent.

10. Bend, Oregon, 36.7 percent.

Obviously this list reflects the general movement in the American population toward the South and West. The list also seems to reflect a correlation between high population growth, on the one hand, and the low tax and pro-growth economic policies followed by the individual states where the cities are located, on the other. For instance the nine fastest-growing cities are in so-called "red" states, measured by whether a state voted for George W. Bush for President in 2004. Moreover, the six fastest-growing cities, and eight out of the top ten, are in so-called "right to work" states, that is, states that have opted under the Taft-Hartley Act to prevent unions and employers from negotiating "closed shop agreements," that is, collective bargaining agreements requiring employees to join a union as a condition of employment. (See here for a list of such states.) Also, three of the five fastest growing cities are in states (Florida and Nevada) with no income taxes. Finally, according to the Tax Foundation, eight of the ten cities listed, including seven of the top eight, are ranked among the states with the fifteen best tax climates for business.

The data thus show the American system of competitive federalism at work, with citizens moving to states that adopt pro-growth economic policies, e.g., low taxes and right to work laws. This blog has previously discussed other evidence of such competitive federalism at work. It should be noted that such competitive federalism is not a permanent or given phenomenon, but is instead the result of institutional choices contained in the Constitution itself and federal legislation. For instance, the Constitution divides power between the national and local governments, thereby depriving the national government of a monopoly over the content of tax and regulatory policy. Perhaps James Madison had this sort of competition in mind in Federalist 51, when he wrote:

"In the compound republic of America, the power surrendered by the people is first divided between two distinct governments, and then the portion allotted to each subdivided among distinct and separate departments. Hence a double security arises to the rights of the people. The different governments will control each other, at the same time that each will be controlled by itself."

Moreover, states cannot prevent their citizens from traveling to or moving to another state. See Crandall v. Nevada, 73 U.S. 35 (1868). This "fundamental right to travel" ensures that citizens may "exit" states whose economic policies thwart economic growth and wealth creation, and such exit no doubt explains much migration from one state to another. Finally, there is the Taft-Hartley Act, which allows individual states to opt out of that portion of federal labor law that otherwise allows companies and unions to negotiate closed shop agreements. None of this is to say that ALL federal legislation, for instance, facilitates competitive federalism. Some such legislation imposes a uniform federal approach to a regulatory question. In some cases such a unified approach is justified, as when an alternative approach would leave each state free to impose its own regulatory choices on interstate commerce. However, given the vast (and unjustified) scope of the national commerce power under current Supreme Court precedent, some such purportedly federal legislation applies to purely local matters, thereby eliminating the possibility of rivalry between states on matters of local concern. (At the same time, Congress does not always exercise all of the power the Supreme Court has given it. For instance, Congress still allows states to determine much of the content of corporate law, even though Congress possesses the authority under current law to impose a national corporate code.) Finally, some federal legislation affirmatively distorts rivalry between the states, subsidizing those that unduly tax their own citizenry. Thus, under the current tax code, citizens may deduct state taxes from their actual income when calculating that share of their income that will be subject to federal tax. As a result, a state that increases its taxes thereby deprives the national government of revenue the latter would otherwise receive, effectively shifting a portion of the state tax increase to citizens of other states, who must make up the lost federal revenue or, eventually, pay the interest on additional debt the national government must take on to meet its obligations. In short, competitive federalism can enhance overall economic welfare by preventing states from adopting legislation that infringes on economic liberty, and the census results reported by Money/CNN show the results of such federalism at work. At the same time, background rules that allocate too much power to the national government and impact the incentives that states face can dampen such competition and thus undermine (in part) its welfare-increasing properties.

Saturday, April 2, 2011

Over at Salon, Glenn Greenwald chastises President Obama for supposedly embracing the same theory of Executive War Power purportedly embraced by President George W. Bush, a theory that Greenwald rejects. Greenwald heaps particular scorn on two different items expressing a strong view of the President's War Powers.

1) The memo, by the Bush Department of Justice, aruging that President Bush could intercept communications between Americans and individuals on foreign territory whenever the Attorney General found probable cause to believe that one or both of the individuals was affiliated with Al Qaeda. The memo, which justified the so-called "Terrorist Surveillance Program" ("TSP") argued that the President could order the interception of such communications without regard to the requirement, apparently contained in the Foreign Intelligence Surveillance Act ("FISA"), that the Attorney General first obtain a warrant from an Article III court. Imposing that requirement, the memo said, would infringe upon the President's power as Commander-in-Chief of the Armed Forces, which according to the memo included the power to gather battlefield intelligence in wartime.

2) A recent purported statement by Secretary of State Clinton that, even if Congress were to pass legislation countermanding the attack on Libya, the Administration would nonetheless continue with military action there. (I say "purported statement" because the statement allegedly occurred durring a classified briefing, the contents of which have been leaked. So far as I know the Administration has made no public statements to this effect.)

Greenwald finds these positions equivalent and both quite wrong. As he puts it:

"Initially, I defy anyone to identify any differences between the [Obama] administration's view of its own authority -- that it has the right to ignore Congressional restrictions on its war powers -- and the crux of Bush radicalism as expressed in the once-controversial memos by John Yoo and the Bush DOJ. There is none. That's why Yoo went toThe Wall Street Journal to lavish praise on Obama's new war power theory: because it's Yoo's theory (as I was finishing this post, I saw that Adam Serwer makes a similar point today). If anything, one could argue that Yoo's theory of unilateral war-making was more reasonable, as it was at least tied to an actual attack on the U.S.: the 9/11 attacks. Here, the Obama administration is arrogating unto the President the unilateral, unrestrained right to start wars in all circumstances, whether or not the U.S. is attacked."

Greenwald also claims that those who supported President Bush's view of the Executive Power invoked FDR's internment of Americans of Japanese descent as precedent for that view. As he puts it:

"Then there's the notion that Presidents in the past have started similar wars without Congressional approval. That's certainly true, but so what? The fact that an act is commonplace isn't a defense or justification. That "defense" was also a common refrain of Bush followers to justify their leader's chronic unconstitutional acts and other forms of law-breaking: Lincoln suspended habeas corpus and FDR interned Japanese-Americans, so why are you upset that Bush is acting outside the law?"

One might add --- althought Greenwald does not mention it --- that President Clinton also asserted --- and exercised --- the unilateral power to attack a sovereign nation, that is, Serbia, against whom the United States and its NATO allies waged an air campaign for 78 days. Congress did not authorize the campaign. At the same time, I am not aware that President Clinton ever claimed that he would ignore an act of Congress that purported to countermand his decision to make war on Serbia.

In my view Greenwald overstates the equivalence between the position taken by President Obama (and Clinton) on the one hand, and that taken by President Bush, on the other. In some ways President Obama' claim of executive warmaking power is broader than that articulated, or at least pursued, by President Bush. But, there is also one sense in which President Obama's actual assertion of authority is less sweeping than President Bush's. Here is what I mean.

1. It is certainly true that President G.W. Bush, like various Presidents before him, made extravagant claims of unilateral power to initiate war with other countries. However, unlike President Clinton, who attacked Serbia without congressional authorization, and President Obama, who has attacked Libya without congressional authorization, President Bush in fact sought and obtained express legislative authorization to attack Al Qaeda as well as express legislative authorization to invade Iraq. Thus, while Presidents Clinton, Obama, and Bush all said similar things about the authority of the Executive branch to intiate war, only Presidents Clinton and Obama actually attacked other nations --- nations that did not threaten us it should be added --- without Congressional authorization. In this sense, any equivalence between President's Obama and Clinton on the one hand, and President Bush on the other, is illusory.

2. Given the Congressional authorization that President Bush sought and received to invade Afghanistan, known as the "Authoritzation to Use Military Force" or "AUMF," the analogy between the TSP and the attack on Libya (or Serbia) does not hold up. The AUMF authorized the President to "use all necessary and appropriate force" against Al Qaeda, thereby empowering the President to act as Commander-in-Chief of the Armed Forces in prosecuting a war against that terrorist organization. Neither President Clinton nor President Obama sought or received any authorization before making war on Serbia and Libya, respectively.

Article II of the Constitution expressly empowers the President to act as Commander-in-Chief, a power Joseph Story characterized as the power over "the direction of war" that is "obviously of an executive nature." Congress cannot strip the President of this power, any more than it can deprive him of the power to nominate a judge or pardon a felon. See Public Citizen v. Department of Justice, 491 U.S. 440 (1989) (Kennedy, J. concurring) (Congress cannot by legislation interfer a power --- there the power to nominate and appoint judges --- expressly committed to the President).

This power to "direct war" by setting military strategy and tactics presumably includes the power to gather the sort of strategic and battlefield intelligence necessary to inform such decisions. Such intelligence gathering would normally include the use of spy planes, satellites, drones, the interception of enemy radio traffic and so on. In World War II, for instance, the Navy relied heavily upon intercepted transmissions between German U-Boats and the German High Command and employed such intelligence, along with the results of aerial surveillance, to redirect convoys and target the submarines for destruction. To be sure, Congress does possess authority to make regulations governing the armed forces. Still, would anyone (aside from Greenwald apparently) argue that Congress, having declared war on Germany, and having appropriated funds for intelligence assets, then could by legislation order the Commander-in-Chief NOT to intercept such communications and/or NOT to conduct such aerial surveillance? And, if Congress could exercise such authority, could it not also, say, tell the President whom to appoint as the Supreme Commander over Allied forces preparing to invade Europe or, because it has the power to raise taxes, legislatively order the President not to veto a tax increase or not to pardon tax cheats? (Note that President Bush is not the first President to assert the power to decline to enforce unconstitutional statutes. As previously explained on this Blog (see here and here), Abraham Lincoln and James Madison each believed the President possessed such power, and Lincoln exercised it. Moreover, Woodrow Wilson exercised such power when he ignored a statutory requirement that he obtain Senatorial consent before firing a Postmaster, and the Supreme Court agreed with his interpretation of the Constitution in Myers v. United States, 272 U.S. 52 (1926).)

In short, assuming that Greenwald is correct (and I believe that he is) that a President cannot unilaterally initiate a non-defensive war, President Bush's claim that he could intercept Al Qaeda communications without adhering to FISA, after Congress had authorized war against Al Qaeda, is in no way similar to President Obama's decision to attack Libya without Congressional authorization. That is to say, while Article II of the Constitution does not empower the President to attack other nations without provocation, it does empower the President to act as Commander-in-Chief once Congress has authorized such an attack. Failing to enforce an unconstitutional statute is not equivalent to exercising a power --- the power to initiate war ---that only Congress possesses.

3. At the same time, there is one sense in which President Obama has been more deferential to Congress than was President Bush. That is, Congress has not purported by legislation or otherwise to prevent President Obama from attacking Libya. Thus, unlike President Bush (or, for that matter, Woodrow Wilson) President Obama has not ignored a Congressional statute.

4. Finally, Greenwald seems to imply that supporters of President Bush relied upon President Roosevelt's unconstitutional internment of Americans of Japanese descent to justify President Bush's refusal to adhere to FISA when intercepting Al Qaeda communications. (Perhaps I am misunderstanding Greenwald's meaning.) I am not aware that supporters of President Bush invoked FDR's unlawful internment to justify President Bush's policies. As should be clear at this point, there is plenty of other precedent and logic supporting President Bush's limited refusal to follow FISA, for instance.

Friday, April 1, 2011

CNN reports that Ford has surpassed General Motors in sales for the first time in 13 years. All this despite the fact that GM received a $19 Billion dollar bailout (not counting a $30 Billion post-bankruptcy loan to GM) that Ford declined. Moreover, an industry analyst attributes Ford's surge in part to the firm's attractive array of fuel-efficient vehicles, including small SUVs (apparently a reference to the Mercury Mariner hybrid) now in high demand given the recent spike in gasoline prices. This result is ironic to say the least, as President Obama justified the bailout in part by claiming that the bailed out companies would help America "lead the world in building the next generation of green cars." (The $40,000-plus Chevy Volt, on which some say Chevrolet will lose money, is an example of the sort of "leadership" the President was apparently talking about.) That is to say, the free market (Ford), incentivized by artificially high gasoline prices (because of the OPEC Cartel and gasoline taxes) and unassisted by taxpayer largesse, has done a better job implementing the President's "clean car" policies than the company owned and subsidized by the national government.

Some of Your Blogger's Papers Are Posted Here:

Bishop James Madison

Portrait of Bishop James Madison

Who Was Bishop Madison ?

Bishop James Madison, the cousin of our nation's fourth President, was the President of the College of William and Mary from 1777 until his death in 1812. Prior to appointment as President, Madison served as a professor of natural philosophy and mathematics. During the Revolutionary War, Madison organized a militia company of students. William and Mary claims that Madison was the first professor of Political Economy in the United States. His lectures on the subject relied upon Adam Smith's Wealth of Nations, published in 1776. Along with Thomas Jefferson, Madison was instrumental in founding the School of Law at William and Mary, appointing George Wythe as William and Mary's first Professor of Law and Police.